In a favorable ruling for employers defending against wage statement compliance claims, the California Supreme Court in Naranjo v. Spectrum Services Inc. (Naranjo) settled an age-old dispute by determining that an employer that reasonably and in good faith believed it was providing a complete and accurate wage statement has a viable defense to a claim for penalties under the California wage statement statute.

Background

The plaintiff filed a putative class action lawsuit alleging, among other things, that the employer had violated state regulations governing meal breaks. The lawsuit sought several forms of relief, including derivative statutory penalties prescribed for “willful[]” failure to comply with the timely payment requirements (Lab. Code, § 203 (section 203), subd. (a)), and the penalties prescribed for the “knowing and intentional” failure to comply with the wage statement requirements (§ 226, subd. (e)(1)).

In the approximately decade and a half since Naranjo was first filed, the case took a number of turns through the court system. Naranjo first made its way to the California Supreme Court in 2022, when the Court was asked to resolve a division in state and federal courts about whether the law requires employers to treat certain amounts—premium pay awarded for the deprivation of a lawful meal or rest break—as wages earned.  The California Supreme Court answered the question in the affirmative, holding that meal and rest period premium pay is wages subject to the Labor Code’s timely payment and wage statement reporting requirements, which may support the award of penalties. However, questions loomed over whether the failure to report meal period premium pay on employees’ wage statements was “knowing and intentional” for the purpose of imposing penalties under Labor Code section 226(e), which provides for statutory penalties of up to $4,000, or the employee’s actual damages, for knowing and intentional violations of the reporting requirements outlined in section 226(a).

The Court’s Analysis

The Court noted the two-tier remedial structure of Labor Code section 226, with the first tier set forth in section 226(h), subjecting an employer that fails to comply with the wage statement requirements generally to an enforcement action by the Division of Labor and Standards Enforcement or a private suit for costs and attorney’s fees, as well as an injunction compelling future compliance.  The second tier, set forth in section 226(e), further adds the potential for statutory penalties to be awarded based on a “knowing and intentional failure by an employer to comply” with section 226(a).     

Courts of appeal and federal district courts have diverged on whether an employer has knowingly and intentionally failed to comply with section 226(a)’s requirements when the employer had a good-faith, yet erroneous, belief that it was in compliance.

In a win for employers, the California Supreme Court concluded that an employer’s objectively reasonable, good-faith belief that it has provided employees with adequate wage statements precludes an award of penalties under section 226, finding an employer’s good-faith, albeit mistaken, belief that it has complied is not a “knowing and intentional” violation as required by the statute.

The Court rejected the plaintiff’s contention, relying on language in section 226(e)(3), that the only defense to a claim for penalties under section 226 was for isolated and unintentional payroll errors due to a clerical or inadvertent mistake. According to the Court, clerical or inadvertent mistakes are an illustrative, but not exhaustive, example of a situation where an employer would not engage in a knowing and intentional violation of the statute. Additionally, the Court did not agree with the approach taken by some appellate courts that found a “knowing and intentional” violation if the employer is aware of the “factual predicate” underlying the violation—for instance, that it has not reported certain information on an employee’s wage statement, regardless of whether the employer believes in good faith that it has complied with the law. In the Court’s view, it is illogical to penalize employers that act in good faith and believe they have complied with legal requirements.

The Court felt it was appropriate to harmonize the wage statement statute with section 203, a statute which imposes penalties for a willful failure to pay wages timely upon separation, because employees often bring derivative claims for violations of section 203 and section 226 at the same time: “We see no sound reason why the Legislature would have wished to withhold penalties for nonpayment of wages when an employer ‘disputes in good faith an employee’s claim for wages’, and yet would have wished to impose penalties for failing to document those same earned but unpaid wages on an itemized wage statement.”

Finally, the Court dismissed concerns that excusing section 226 penalties based on good-faith mistakes of law will excuse and incentivize ignorance of the law, underscoring how courts already evaluate an employer’s misunderstanding of legal requirements against a standard of objective reasonableness, which gives little reason to worry that adverse incentives for employers will arise. 

Applying its ruling to the present case, the Court determined that the employer could not be subject to penalties under section 226 because it had a reasonable, good-faith basis for believing it was complying with the law. This was particularly evident because the legal issues contested in this case, spanning over a decade, were uncertain when the lawsuit was initially filed.  The Court noted, for example, at the time the lawsuit was filed, the law was not clear regarding whether premium pay constituted wages that must be reported on wage statements, and this remained an outstanding legal question until the Court addressed the issue in 2022.

Takeaways for California Employers

This decision makes clear that employers can raise a viable defense against claims for penalties for wage statement non-compliance, assuming the employer can show it reasonably and in good faith believed it was providing a complete and accurate wage statement in compliance with the law. But like the standard applicable to “willful” claims for waiting time penalties under Labor Code section 203, this can be a challenging standard to meet.  However, the Naranjo decision now gives employers an additional defense to the imposition of statutory penalties for wage statement non-compliance in certain cases, which may be particularly important in defending individual and class action lawsuits, where wage statement violations are often premised on disputed claims. Employers should remain vigilant in making sure they fully comply with California’s very strict wage statement requirements.